Are you trying to add a sales tax rate to your QuickBooks Pro account but aren’t sure whether to use a sales tax item or sales tax rate? You’ve come to the right place.
Small business sales tax can be straight-up byzantine, and navigating QuickBooks Pro is equally disorienting at times. In this post, we’ll clearly explain the difference between sales tax items and sales tax groups in QuickBooks. We’ll also help you choose which method is right for your business using accounting advice from real CPAs. Because when it comes to small business sales tax, you simply can’t take chances.
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What’s The Difference Between A Sales Tax Item & A Sales Tax Group?
If you’ve read our Small Business Sales Tax Guide, you know that sales tax is a bit confusing–especially when different states, counties, and even cites charge different tax rates. We’ve contacted real CPAs for their expert advice on handling sales tax rates. But first, we’ll define sales tax item and sales tax group.
A sales tax item is a single tax rate; a sales tax group is a collection of individual sales tax rates that are added together to create a single rate.
Here’s an example. Say you are charging sales tax to a customer in King City, California. King City has a city tax of 0.75% and California has a state tax of 7.5%.
If you were to create a sales tax item, you would impose a blanket tax rate of 8.25%.
If you were to create a sales tax group, you would create one sales tax item for King City and another for California. Add 0.75% to 7.5% for a total group sales tax rate of 8.25%.
When Should You Use A Sales Tax Item?
Tiffany Powell, owner of Sapphire Bookkeeping & Accounting Inc, says:
We generally only recommend using a single tax rate when you are paying all parts of your sales tax to one entity.
Ultimately, it comes down to the individual state rules and whether or not the state requires you to report city, county, and state tax separately.
There’s one other case where you may want to use a single sales tax item in QuickBooks. According to Powell:
You can also use a single rate item when you are listing invoices for Resale or Non-taxable so that you can keep track of amounts excluded from sales tax.
Sally Balson of Balson Bookkeeping Company, LLC, gives the same advice to her clients:
I do also caution my clients to know the difference between non-taxable sales and exempt sales. You can sell to a church, for example, who is exempt from sales tax but the items you sold are taxable items. Most states require you report sales to exempt organizations separate from non-taxable sales. Then also keep track of the sales tax you paid on item you resell or use to manufacture an item for sale. States allow you to deduct this cost from your sales tax obligation, so you are not double taxing the items.
When Should You Use A Sales Tax Group?
While there are cases where you may want to employ a sales tax item, most small businesses will generally use sales tax groups.
If you operate in multiple counties and/or multiple states, then a Sales Tax Group is better. This allows you to track each collection. Also, the Sales Tax Group allows you to reuse common Sales Tax Items; for example, you operate in 3 counties and 1 city with sales tax but you have to collect state tax for all those locations so you would set up a group with the state item in each group. On the report you will see a line totaling the state tax collected, each county tax collected, and the city tax collected including the amount of sales for each of those locations.
Many states require small businesses to show the separate sales tax collected from each city or county. But this isn’t the only reason to use sales tax groups. Sales tax groups often look cleaner on invoices.
CPA Timothy L. Shore shares:
Using the sales tax item could result in separate line items on an invoice for the state, county and local tax. Therefore, it is better to use the sales tax group which is used to individually track the separate locales, but the customer only sees one sales tax [rate] on their invoice.
And according to Powell, there is another advantage to sales tax groups:
This is also helpful if a city changes their sales tax rate. You are then able to update just the item rate and it will then automatically update the group rate.
Now that you know the difference between sales tax items and sales tax groups, read How to Add Sales Tax Rates In QuickBooks Pro for step by step instructions on adding rates to your QuickBooks account. If you’re still not sure which method is right for your small business, read our Small Business Sales Tax Guide and/or consult your accountant for advice.